The Post-Inflation Economy That Could Be

By Raghuram G. Rajan

CHICAGO – Economic commentaries nowadays are typically

about inflation or recession, so let’s instead consider growth
prospects once central banks get those challenges under control.

As matters stand, there appear to be worrisome headwinds to

growth. As most advanced-economy populations age, their
labor-force growth is slowing, so there will need to be greater
productivity per worker to compensate. But with investment in
physical capital muted, labor productivity is unlikely to grow
rapidly without significant innovation, either in work processes
or products. While it initially appeared that increased
telecommuting during the pandemic would enhance productivity
(by saving time and avoiding the duplication of capital at home
and in the office), many firms are rediscovering the value of
having workers in the office at least for some of the time.

Another headwind comes from poorer countries, where lower-

middle-class households have suffered tremendously through the
pandemic and now from food- and fuel-price inflation. Many
children have missed more than two years of school and are
likely to drop out, permanently impairing their earning potential
and the skill-base of the labor force more broadly. Meanwhile,
de-globalization – through re-shoring, near-shoring, and friend-
shoring – threatens to make it even more difficult for them to get
good jobs. In the longer run, the weakness of demand in these
countries will spill over to the developed world.
If the world does not find new sources of growth, it will fall
back into the pre-pandemic malaise of secular stagnation. But
this time, the situation could be worse, because most countries
will have limited fiscal capacity to stimulate the economy, and
because interest rates will not fall back quickly to their pre-
pandemic lows.

Fortunately, there are tailwinds that could be unleashed. While

trade in goods seems to have reached its limits before the
pandemic, trade in services still has not. If countries can agree to
remove various unnecessary barriers, new communications
technologies would allow many services to be offered at a
distance.

If a consultant working from home in Chicago can cater to a

client in Austin, Texas, so can a consultant from Bangkok,
Thailand. Yes, consultants in other countries might need to have
front offices in the United States to assure quality or redress
complaints. But the overall volume of work that could be
undertaken by global consulting companies would grow
substantially, and at a significantly lower cost, if their services
could be offered across borders.

Similarly, telemedicine has become increasingly feasible not just

in psychotherapy and radiology but also in routine medical
diagnoses (sometimes aided by local equipment or a nurse
practitioner). Again, global organizations (for example, a global
Cleveland Clinic) could help reduce informational and
reputational barriers, allowing for a general practitioner in India
to conduct routine medical exams for patients in Detroit –
referring them out to specialists in Detroit when needed.
The biggest barriers to such trade in services are not
technological but artificial. Understandably, the authorities in
advanced economies do not allow general practitioners in India
to offer medical services without proper certification. But the
problem is that most countries’ certification procedures are
unnecessarily cumbersome. What if the world could agree on a
common certification process for the work done by general
practitioners? A country with unusual ailments could tack on an
addendum to the exam for those who want to practice there, but
only if absolutely necessary.

A second problem is that national health-insurance schemes

typically do not pay for services from outside the country. But if
the certification challenge has been met, there is no good reason
why they shouldn’t, given the cost savings that would result.

A third barrier is data and privacy. No patient will be willing to

share personal details or test results if she cannot be sure that the
data will be kept confidential and safe from misuse. In an era of
geopolitical tension and economic blackmail, meeting those
conditions requires not just a commitment from the service
provider but also assurances from the provider’s government
that it will not violate patient privacy. Democracies that can
enact strong privacy laws (including limits on how much data
their own government can see) will be better positioned to
capitalize on this trade than autocracies, where there are few
checks on government.

Imagine how much faster and more affordable it would be for a

US citizen to reach a doctor if routine matters were outsourced.
Developed countries would obviously benefit, but so would
developing economies, because the incomes that their doctors
generate would be used to employ more workers locally.
Moreover, these doctors would be less likely to emigrate, and
they could use the same telemedicine technologies to provide
services in remote parts of their own countries. At the same
time, specialists in advanced economies would be able to offer
more of their services to patients in developing countries
without them having to travel to New York or London, as they
currently do.

But aren’t service providers in rich countries likely to resist

removing barriers that, together with the difficulty of competing
at a distance, have ensured them high wages? Probably, but
there will still be significant domestic demand for their non-
routine services. Also, if barriers are lowered elsewhere, they
will be able to serve much larger markets with specialized high
value-added services. For this reason, an agreement on reducing
barriers to services trade among a broad set of countries will
have a greater chance of success than bilateral agreements.

Moreover, many others in advanced economies, including

manufacturing workers who have borne the brunt of global
competition, will benefit from cheaper basic services. As
economic inequality both within and across countries decreases,
global demand should also strengthen.
Another potential tailwind for growth lies in “green”
investments. Though Russia’s war in Ukraine has complicated
the clean-energy transition for Europe, much of the world’s
emissions-heavy capital still needs to be replaced, and those
investments could help jump-start the global economy.

To aid the transition, each country will need to establish sensible

incentives for businesses and consumers, such as investment
credits, emission regulations, cap-and-trade systems, or carbon
taxes. Governments also will need to agree on a system for
allocating responsibility to high-emitting countries (which are
typically rich and less vulnerable to climate change), so that they
can help finance the energy transition in low-emitting countries
(which are typically poorer and more vulnerable).

The post-pandemic, post-inflation economic outlook is not all

doom and gloom. But much work needs to be done to dismantle
artificial barriers and leverage existing technologies.